Understanding External Users of Financial Statements

A company's financial statements can be used to predict future booms and busts.

When companies release financial information for the quarter or year, it tends to make waves on Wall Street. That's because a company's accounting, once you wade through the financial intricacies, can help everyone from investors to a firm's managers determine the company's value and future prospects. Anyone within a company who uses accounting information to clarify the firm's financial picture is called an internal user. Those outside the firm who use that same information are called external users, and there are four main types of them.

Investors

Investors are the first type of external user in the field of accounting. An investor is anyone who buys stock in a company or funds a company's operations. Accounting is critical for investors because a company's balance sheet can give clues as to the firm's financial health. Knowing the firm's financial health, or at least having a good approximation of it, is how investors decide what actions to take with existing stock in a company or whether or not they should invest in the first place.

Creditors

Creditors are the second type of accounting external user. A creditor is any individual or institution that has lent a firm money. Usually, creditors are banks. Banks use the accounting statements put out by a company to assess the company's lending risk. If creditors find too many liabilities or debts on a firm's balance sheet, they may be less prone to lending large sums of money to the firm.

Tax Authorities

Tax authorities are any organization assessing a firm's tax liability. In the United States, an example of a tax authority would be the IRS. A country's tax authority uses a firm's accounting to determine how much money the firm owes based on the corporate tax rate and other tax principles. A tax authority may also use accountants and accounting to determine a firm's assets and tax obligations if the firm has failed to pay the proper amount of taxes in the past.

Customers

The fourth type of external user is the customer. Customers need accounting information to determine a company's financial health and to project its future financial solvency. While the individual consumer may not be looking often at a company's accounting methods and results, other firms that do business with a company do.